4/23/2009 @ 7:00PM

Test of Mettle

Steel giant Nucor pays for performance and shuns layoffs, even in the worst of times. Chief Dan DiMicco keeps the faith.

Steel plate sells for less than half the $1,500 a ton it fetched a year ago. That’s bad news for Nucor, the largest U.S. steelmaker. Nucor’s plants are running at less than 50% capacity; analysts expect a $200 million loss in the first quarter, and many of Nucor’s 22,000 employees are working half-time. Outside contractors have been let go, so Nucor employees now mow lawns and clean bathrooms. Yet Chief Executive Daniel DiMicco has not laid off a single employee or even reduced benefits. “The practice goes back to day one, of not laying off employees for lack of work,” he says. What’s more, Nucor in the first quarter paid out $270 million in 2008 profit sharing, and each worker got a $2,000 bonus ($40 million total).

Lenient labor policies might scare shareholders of some firms, but they work at Nucor. During the past six years DiMicco has steered the Charlotte, N.C. company to an annualized 32% total shareholder return, well outpacing rivals. DiMicco’s compensation during that time averaged $5.3 million (including base, bonus and exercised options). That lands him in the top ten in our annual survey scoring executives on how much they did to earn their paychecks.

Paying for performance lies at the heart of Nucor. Steel mill workers earn weekly bonuses based on how many steel sheets or beams their group turns out. The bonuses account for two-thirds of take-home pay. “We pay weekly because spouses will perform a good kick in the butt if you have an off week,” says DiMicco, 58, who joined Nucor in 1982 as a metallurgist. DiMicco’s own compensation involves three-year performance metrics tied to return on equity, return on capital and revenue growth relative to steel industry peers. The company earned $1.8 billion on $23.7 billion sales last year. “If all the stars and planets align I could make upwards of $10 million.”

The Nucor system was forged by Kenneth Iverson (1925–2002), who transformed a failing nuclear instruments company into a hugely successful chain of steel minimills. These small, electric-powered mills can be turned on and off quickly and cheaply turn scrap into angles and rebar.

Iverson made Nucor frugal, fraternal and egalitarian. No executive parking spaces or dining rooms; everyone flies coach and gets the same health insurance and benefits package. Iverson began the practice of printing the name of every employee in the annual report. This took up 14 pages last year.

When DiMicco was tapped for the top job in 2000, Nucor was producing 11 million tons a year. At 21 million tons last year, Nucor has grown while the rest of the U.S. steel industry contracted–acquiring 27 businesses and doubling its mills to 20. Last year Nucor paid $1.4 billion for scrap-metal broker David J. Joseph, making it the biggest recycler of scrap in the nation, using 20 million tons a year as furnace feedstock.

For a company with an unusual way of treating its workers, any acquisition has land mines. Often the workers in an acquired mill were making base pay 2.5 times Nucor’s rate. Nucor offers new employees a choice of their old compensation systems or Nucor’s. DiMicco says most soon select Nucor’s because they can make more with the bonuses.

The managerial hierarchy has only four layers. Shop floor workers report to supervisors, who are overseen by general managers, who report to executive vice presidents, who answer to DiMicco. Most competitors’ tiers are more than twice that deep. Only 86 employees work in Nucor’s headquarters.

DiMicco was worried about rank-and-file fallout two years ago when the board decided it was time to break with 40 years of tradition and purchase its first corporate jet. DiMicco wrote a letter, sent to every worker’s home, explaining the jet would save time and money sending managers to visit Nucor’s 180 locations. Employees were said to appreciate the personalized explanation.

Today DiMicco’s worries center on low-priced steel from Chinese mills. The U.S. imports 30% of its steel, much of it from China. “Don’t define us as protectionist; that’s not what we’re about,” he says. “We only want our trading partners to abide by the rules of the wto.” Michelle Applebaum, a former Salomon Smith Barney analyst now on her own, comes to Nucor’s defense. Figure in government subsidies and the cost to society of uncorrected pollution, she says, and you find that China is the world’s highest-cost steel producer. Nucor is the most efficient steelmaker in the world, she says.

“It’s absolutely critical that the U.S. is capable of having a strong and growing manufacturing sector. We can’t do that without a strong steel industry,” says DiMicco. Nucor has applied for permits in Louisiana to build a blast furnace mill that would cost more than $2 billion and create thousands of jobs. The U.S. Environmental Protection Agency is in a position to stop the plant. Another potential killer would be carbon permit legislation, if that ever gets enacted. DiMicco says that a cap-and-trade system could add $50 to the cost of a ton of steel, an unfair burden if Chinese, Indian and Brazilian steelmakers aren’t subject to the same rules.

For a full listing of chief executive paychecks and other compensation data, go to www.forbes.com/ceos.